Quebec’s balanced books give Legault room for tax breaks

Quebec’s balanced books give Legault room for tax breaks
Quebec plans to balance its budget for a fifth straight year following a record surplus, enabling new Premier François Legault to give tax breaks to families, homeowners and older workers.

Canada’s second-most populous province benefited from a surge in tax revenue and lower borrowing costs that led to an operating surplus of $5.6 billion (Canadian) for the year ending March 31, the largest since at least the 1970s. The surplus was $2.5 billion after contributing to a debt reduction pool known as Generations Fund.

Legault, whose Coalition Avenir Quebec took power for the first time in October, has vowed to retain investor confidence by sticking to his predecessors’ fiscal discipline. He’s facing less favourable conditions, as slowing growth and an aging workforce put pressure on the government to make the economy more competitive.

“Last October we found public finances in good shape — we will continue to improve them,” Finance Minister Eric Girard told reporters after releasing the budget in Quebec City Thursday.

Legault inherited a balance sheet that is the envy of most Canadian provinces. While most regions are running sizable deficits, led by Ontario, Quebec is forecast to post another $2.5 billion operating surplus next fiscal year, followed by $13 billion more in combined surpluses over the next four years. By law, Quebec is required to set aside any surpluses into a stabilization reserve, resulting in a balanced budget.

Spending Boost

That fiscal room allows for a 5 per cent increase in program spending for 2019-20, to $104 billion. Revenue is forecast to rise 1.8 per cent to $115.6 billion, including transfers from the federal government.

Brian Calder, a trader and fund manager at Franklin Bissett Investment Management in Calgary, said before the budget was released that investors are comfortable with the new government because it “ didn’t really skip a beat’’ in following its predecessor’s fiscal track record.

The confidence shows in Quebec’s borrowing costs, which have declined at a faster pace than Ontario, which hasn’t disclosed a path to balance. Quebec’s 10-year bonds yield about 2.42 per cent, or three basis points less than Ontario, according to Bloomberg Valuation data.

Still, Quebec’s past spending sprees over decades is still showing up in its relative debt levels, which are the highest in the country after Newfoundland. The government, which accelerated debt buybacks since coming to power, plans to pay down $11.3 billion this fiscal year, using about $8 billion from the generations fund.

Fiscal Prudence

Debt as a percentage of gross domestic product will be 46 per cent as of March 31, dropping to 45 per cent of GDP by 2021, five years earlier than originally forecast.

“They do need to maintain this course of fiscal prudence over the long run,’’ said Calder, who oversees about $6 billion in fixed income, including Quebec bonds. “ It’s going to take them a long time of sustained effort to pay down that accumulated debt.’’

Quebec plans to borrow $11.8 billion in 2019-20, down from $15.6 billion this fiscal year as it took advantage of low interest rates to prefinance $4.2 billion. About 17 per cent of borrowing was in foreign markets this fiscal year, and the province issued two green bonds.

The budget is built on projected economic growth of 1.8 per cent in 2019 and 1.5 per cent for 2020, down from 2.3 per cent last year. Growth is expected to slow even further for the following three years, to 1.3 per cent.

Retiring Workers

One of the most pressing issues is to cushion the decline in the labour pool due to retiring baby boomers, which has created staff shortages across the province as unemployment hovers near record lows. The jobless rate is forecast to fall even further by 2023 to 5 per cent, from 5.4 per cent this year, according to budget documents.

About a quarter of the population in Ontario aged 60 and older are still in the workforce, compared with just a fifth of that age group in Quebec.

“Our goal is quite clear — bridge the gap between Ontario and Quebec,” Girard said. “That would mean 90,000 more workers on which to count for economic growth and wealth creation.”

Girard offered payroll tax cuts to employers of workers aged 60 and above, and enhanced tax breaks for their older employees to encourage them to remain in the workforce. That adds to fiscal incentives previously announced to boost corporate investment and improve productivity.

“They’re trying to sow the seeds of future growth” said Sebastien Lavoie, chief economist at Laurentian Bank Securities in Montreal. “If you want to continue financing government programs, you have no choice but to generate revenue.”

The budget includes $16.2 billion in new programs and tax breaks for 2018-2024, including:

A $1 billion fund to help develop ‘strategic’ businesses in Quebec, including a team to “protect” head offices.

Introduction of full-year kindergarten for four-year-old children. The plan will be optional, and cost the government $1 billion over five years.

A reform of the provincial school tax system, which reduces property taxes by $1.24 billion over five years.

Spending more than $700 million over six years to develop artificial intelligence training and support innovative businesses.

Extend electric vehicle subsidies, with grants of up to $8,000 for new and used cars. The federal government announced a similar $5,000 credit in its budget Tuesday.
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